Microsoft vs Alphabet: Same AI Race, Opposite Verdicts

On Wednesday, October 28, the two largest cloud companies in the world reported earnings for the same quarter, ended September 30, within an hour of each other. The operating stories looked similar. The stock market reactions did not. Microsoft (MSFT) rose about 4% in after-hours trading. Alphabet (GOOGL) fell about 9%. The gap between those two moves is the cleanest summary of what investors care about in the AI buildout right now: not who is growing fastest, but who is paying for the growth out of cash the business already generates.

What happened

Microsoft beat expectations across the board. Revenue rose 19% to $92.3 billion, against about $90.7 billion expected according to LSEG consensus figures reported by CNBC. Adjusted earnings, excluding the effects of the investment in OpenAI, came in at $4.89 a share against about $4.73 expected. Reported net income was $36.6 billion, helped by a $207 million net gain on the OpenAI investment, a swing from a $3.1 billion loss on the same line a year earlier.

Alphabet missed, narrowly on the top line and widely on the bottom line. Revenue rose 25% to $127.6 billion, just below the $128.2 billion consensus, and CNBC called it the company's first revenue and earnings miss in nearly four years. Earnings were $2.12 a share against $3.02 expected. Most of that gap sits below the operating line: Alphabet booked an $8.7 billion loss on equity securities, the shares it holds in other companies, which cut earnings by $0.55 a share. Excluding that paper loss, earnings were about $2.67 a share, still below consensus.

The numbers side by side

Two cautions on the table. The backlog figures are not measured the same way: Microsoft reports contracted commercial revenue across the whole company, Alphabet reports its cloud order book, of which about 55% should turn into revenue over the next 24 months. And Alphabet remains the bigger business overall, with a large advertising operation Microsoft does not have. The comparison that matters is the cloud race and the cash.

Two clouds, both booming

Strip out everything else and the cloud numbers are close. Azure revenue grew 48%, accelerating from 42% in the prior quarter, and Microsoft put a dollar figure on Azure for the first time: $33.2 billion. Google Cloud revenue grew 103% to $30.7 billion, more than doubling, with operating income of $11.1 billion and a margin of about 36%. A business that lost money a few years ago now earns at a margin most software companies would accept.

The rest of Alphabet's machine kept working, at a slower pace. Search and other advertising revenue rose 12% to $63.4 billion. YouTube ads rose 9% to $11.2 billion, below expectations. Subscriptions, platforms and devices rose 11% to $14.3 billion. Google Services in total brought in $96.3 billion with operating income of $39.2 billion. The Gemini app passed 1 billion users, and chief executive Sundar Pichai pointed to a revenue run rate, the current quarter scaled up to a full year, of half a trillion dollars.

Microsoft's soft spots sit outside the cloud. Windows licensing and devices revenue fell sharply, by roughly a quarter, and Xbox content and services slipped 2%. Neither matters much while Azure compounds at close to 50%, but both show where the older consumer businesses stand.

Where the verdicts split: cash

Capital expenditure, the money spent on data centers, chips and equipment, is where the two reports diverge. Alphabet spent $51.4 billion in the quarter, up 114% from a year earlier. Operating cash flow was $42.3 billion, so spending ran ahead of cash coming in, and free cash flow, what remains after that spending, was negative $9.1 billion. It was the second negative quarter in a row, and the quarter also included a $5.2 billion cash payment for a 2018 European Commission fine and a build-up of inventory for its TPU chips.

Alphabet filled the gap in the capital markets. The company issued $28.7 billion of senior notes, bonds sold to investors, and sold about $12.4 billion of its own stock through an at-the-market program, a standing arrangement that lets a company sell new shares gradually at market prices. It ran no share buybacks in the quarter. None of that is a crisis for a company of this size, but it changes the story: the buildout is now partly funded by new debt and new shareholders.

Microsoft spent heavily too, $39.4 billion in cash, or about $45.2 billion including finance leases, the rented buildings and equipment that do not appear in the cash figure. The total was below the roughly $46 to $51 billion analysts had pencilled in, depending on the measure. Operating cash flow was $58 billion, free cash flow stayed positive at $18.6 billion, down 27% from a year earlier but about $10 billion above what analysts expected according to Reuters, and the company still returned $10.2 billion to shareholders through dividends and buybacks. One report showed a company funding the AI race from its own cash generation. The other showed a company raising money to keep pace. The after-hours moves followed that difference, not the cloud growth rates, where Alphabet was faster.

The case for fairness to Alphabet

The headline miss flatters Microsoft a little and punishes Alphabet a little. Alphabet's operating income grew 30%, faster than Microsoft's 21%, and its operating margin rose to 31.8%. The earnings miss is mostly a paper loss on investments, not a deterioration in the business selling ads and cloud capacity. Google Cloud grew at twice Azure's rate and is now nearly the same size in dollars, a position few expected two years ago.

Microsoft's gentler cash spending also needs context. Part of the gap to expectations reflects lease financing and third-party capacity arriving later than planned, and the spending accelerates from here. Guidance for the current quarter puts capital spending above $50 billion including leases, and at about $170 billion for the fiscal year. Microsoft simply started from a stronger cash position and a quarter in which deliveries slipped.

Bull case and bear case

For Microsoft, the optimistic reading is a cloud business accelerating to 48% growth at $33 billion of quarterly revenue, guidance for 49% to 50% Azure growth in the current quarter, a commercial backlog up 73% to $677 billion, and enough cash left over to fund dividends and buybacks. The cautious reading is concentration and cost: growth leans heavily on AI capacity that is still supply constrained, free cash flow fell 27% even in a beat quarter, spending rises steeply from here, and the consumer businesses are shrinking.

For Alphabet, the optimistic reading is the fastest cloud growth among the giants, a cloud margin of about 36%, a $561 billion cloud backlog, an advertising core still growing at double digits, and an earnings miss driven by an investment write-down rather than operations. The cautious reading is the cash: two straight quarters of negative free cash flow, $924 billion of future purchase commitments plus $152 billion of lease and other obligations on maximum contractual terms, 2026 capital spending guidance kept at $195 billion to $205 billion, and a promise from chief financial officer Anat Ashkenazi that 2027 spending will increase significantly, with the number only coming on the next call. Other Bets, the segment that includes Waymo, lost about $2 billion in the quarter.

What to watch next

Three things decide whether the October verdicts hold. First, Microsoft's current quarter: revenue guidance of $96.0 billion to $97.1 billion and Azure growth of 49% to 50% set a high bar, and chief financial officer Amy Hood has said the company expects to stay free cash flow positive in fiscal 2027. Second, Alphabet's fourth quarter call, where the 2027 spending figure lands; that single number now carries more weight than any product announcement. Third, whether Alphabet's free cash flow turns positive again as TPU system sales ramp through 2027, as management expects. Both companies are building the same future. For now, the market is paying for the one that funds it from cash on hand.

This article is for information purposes only and is not financial advice.

Cover: Google and Microsoft logos, via Wikimedia Commons.